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Old Age Pensions 10 Percent of GDP and Rising

January 25, 2011

The top story in today’s Nihon Keizai Shimbun is new Ministry of Welfare and Labor data showing that the burden of state old age pensions has reached the equivalent of 10 percent of GDP and will rise further in the years ahead.  At the same time the ratio of active workers paying into the system to retirees drawing from the system has reached 1.86 to 1.   This is a system and country in crisis.

The Ministry of Welfare and Labor data are for 2009.    In that year total outlays (pension payments) for the first time exceeded JPY 50 trillion, an amount over 10 percent of Japan’s nominal GDP.   

 The total number of retirees receiving pensions reached 37,030,000 persons, an increase of 3.1 percent from the previous fiscal year.   On the other side of the ledger, the total number of persons enrolled in the system and paying premiums declined by 0.9 percent to 68,740,000.   This produced a ratio of active premium payers to recipients of 1.8 to 1.    This is a crisis.

And the crisis will soon get much worse.  The Ministry is forecasting by 2015 a 20 percent increase in outlays, to JPY 59 trillion, when the full impact of the 7 million persons born during Japan’s 1947-49 “baby boom”  have reached 65 and can claim full pension benefits.   By FY2025 the cost will rise to JPY 65 trillion. 

Public pension outlays rising to over 10 percent of nominal GDP is a startling development.  In 2005 the level was around 9 percent, compared with 6 percent in the U.S. and an average of 7.2 percent in all OECD countries.

The bolster the system’s finances, the government has raised the proportion of financing from tax revenue from one-third to one-half.   But with large increases in outlays and a diminishing number of premium payers in prospect, and considering Japan’s overall fiscal imbalance–where expenditures are being financed more with borrowing than taxes receipts–the situation is dire. 

It is said that if something is unsustainable then it will stop.   In the case of Japan’s pension, the stopping will be in the year of eligibility, which is likely to be raised.   But there will certainly be more.

The structure of Japan’s public pension system–like that of the U.S.–is that the actively working population pays premiums which are used to pay pensions to no longer active, retired persons.    This system works when there are relatively many of the former and few of the latter.   What happens when the population in the two categories approaches parity.   Or, the latter grows greater.  Obviously, the system collapses. 

This is where Japan is heading, which is why fundamental rethinking is demanded.

2 Comments leave one →
  1. Aaron Cohen permalink
    January 31, 2011 1:47 am

    One answer to the perplexing issue of funding pensioner benefits is as Spain and France have noticed is an extension of the retirement age. In the ‘old days’ when ‘work’ provided a greater percentage of total happiness than today, this may have had some attraction, At that time, there was plenty of technological innovation going on but it was in the IT field, so skills did not become antiquated so quickly. Now it is younger workers that are needed, not old fogies who wold prefer golf or gateball. … Increasing immigration to get young workers into the system continues to be a subject of interest, and to those possible new arrivals can be an attractive deal if the yen remains strong, because a substantial share of their earnings would be sent to the old country. Among the modifications needed would be bilateral tax agreements to that these workers’ contributions to the Japanese social security program earn credits at home. This is the case for the US and Japan (bilaterally) but it took many years to negotiate and realize. Doing it with LDCs will be a challenge.

    • January 31, 2011 9:00 am

      Thanks, Aaron. I know it is a revolutionary idea, and thus less likely to be embraced in Japan than anywhere else, but tinkering with this system cannot be the answer. The system is structurally broken, will only get worse, and should be scrapped with no substitute. Japan’s demographics simply can no longer sustain an inter-generational wealth tax and subsidy to old people. And when it comes down to it, such a system was always morally questionable. Not just because it was based on compulsion, but also because of the inevitable corruption of politics which follows from allowing politicians to buy votes with other people’s money. I have heard that current retirees will get over five times more in benefits from the system than they paid in, on a constant yen basis.

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